Some Better Options for Those with Extra Money in Savings
In our last blog, we spoke about what to do if you have too much of a safety net parked in your low yield savings account or investment. Here are four suggestions to help you grow the extra money you have available for long term benefit.
1) Max out your company retirement plan.
How much you contribute to your retirement account today makes a big difference over time. Contributions to a traditional 401(k) and 403(b) are tax-deductible and are tax-deferred. The more you put in, the more you end up with in accrued interest and appreciation for a more comfortable retirement. Younger savers may consider a Roth 401(k) that is tax deferred, and may provide tax free income in retirement.
2) Consider the after-tax option if available in your retirement plan.
Although very few employers offer it, there is potential of contributing significantly more to your retirement plan as part of an after-tax option. The IRS pre-tax limits are $18K if under 50 years of age and $24K if you’re over 50. However, the maximum that may be contributed to any-and-all tax-deferred employer retirement plans is $54,000 (or $60,000 if you are age 50 or older). That could mean an additional $36,000 to your 401(k) plan whether you are under or over 50.
3) Consider Roth or other IRA contributions if allowable.
Note that Roth IRAs are limited to those with income of $196K or below for married couples filing jointly and $133K if filing as an individual. If your income is too high and restricts you from this option – consider a non-deductible traditional IRA contribution and conversion to a Roth IRA. To many, this can represent the best of both worlds: tax deferred growth and tax free distributions.
4) Another option is a deferred annuity
A deferred annuity can be a great way to continue your retirement saving if you’ve already contributed the maximum to other retirement accounts. You can defer taxes on your earnings until you make withdrawals.
Basically, you give a lump-sum payment to an insurance company and in return, you get a guaranteed stream of income for life. In this respect, deferred annuities can be similar to immediate annuities.
However, with immediate annuities, the income kicks in right away. With deferred annuities, the benefit payments don’t start until you choose them to down the road. Because the payments take place so far in the future, you may be able to buy a bigger benefit with a deferred annuity compared to an immediate annuity.
The ideas I’ve outlined above are just a few that are worth considering. However, it’s important to stress that these suggestions may not be right for everybody. I encourage you to speak with a financial planner, your accountant or an HR professional in your business to determine the right opportunities for you.
Steve Kohler is Managing Director of DBR Advisory Services at D. B. Root & Company, a Pittsburgh-based wealth management firm. If you would like to contact Steve please e-mail him at firstname.lastname@example.org or call 412-227-2800. Read bio…
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